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MODULE 5 Assignment: Analyzing Currency Management in Multinational

Corporations

AHMET ALPER METIN

ACC 6050-Accounting and Financial Reporting

Nexford University

Dr. Damian Dunbar

Author Note

Ahmet Alper Metin

I have no known conflict of interest to disclose.

Correspondence concerning this article should be addressed to Ahmet Alper Metin.

Email: aalpermetin@[Link]
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Introduction

In this assignment I will review and compare of two companies currency risks and their risk

mitigation strategies, first one is Wallmart US which one is operating in US Markets in retail

sector and second one is a Turkish retail company BIM and operating in Turkish Markets.

In the dynamic landscape of global business operations, multinational corporations face a

multitude of challenges. A key challenge among these is prudent management of currency risk.

Fluctuation and volatility in exchange rates can have a significant impact on financial

performance and competitiveness for multinational corporations operating across borders. To

navigate these challenges effectively, it's crucial for multinational corporations to consider

implementing currency risk management strategies appropriate for their specific business goals.

Step 1: Company Selection and Background Research

For this assignment Walmart US and BIM Turkey are chosen. Walmart US is one of the

largest retail company and operating in different markets mainly for retail and supermarket

business. In this assignment, I will focus on Wallmart’s US branch. On the other hand, BIM is

one of the local Turkish Market chain and retail supplier in Turkish Market.

Wallmart US business model including exporting tangible products and assets to US and

sell them in retail markets. This operating model brings high currency risks and working with

different currencies creates fluctuations in costs of sales. Trading with global suppliers in the first

step could be seen easier for US company such using USD for trading, however when analyzing

deeply from starting the supplier side. Dollar rate is directly effecting cost of the product for

supplier and binding to it will effect cost for Walmart.

Walmart’s strategies for currency risk mitigation and hedging could be summarized as

below:

1. Choice of Invoicing Currency, Walmart define trading currency and transfer currency risk

to its suppliers.

2. Forward Currency Contracts; it allows to Walmart to fix the value in local currency in

early stage and transfer risk to its suppliers.

3. Financial Hedging; purchasing financial instrument again local currencies to hedge

possible losses.

In BIM aspect, Turkish Economy is in now high inflation and controlled currency stage.

In the company operating model is similar to the Walmart’s one, however one difference buying

with USD and selling with TR, local currency. In this kind of a volatile economic environment

currency risk become a vital due to the high fluctuations, limitations for final retail price for keep

competition.(1)

BIM’s currency risk mitigation strategies:

1. Currency positioning; keeping currency transformations according to the present

conditions of Turkish economy.

2. Increasing prices with rate of expected currency and inflation rates, in early stage this

strategy could cause decrease in sales volume but when all market will follow this

method, sales levels will be restored.

3. Inventory strategies and managing stocks according to the currency expectations.

Step 2: Analysis of Currency Conversion Strategies

For financial statements Walmart use USD for both functional and reporting currency and

using constant currency method (2).

BIM’s is using inflation accounting method to evaluate and conversion for currency and assets as

regulations are required (3).

Step 3: Evaluating Hedging Strategies

1. Currency Options

a. Advantages:

i. Options are available almost all major currencies and for smaller amounts.

ii. Buyer could choose strike price and expiry date.

iii. Buyer could create a strategy according to requirements,

iv. The options could be purchase in any time and sold back in fair price when

desired.

b. Disadvantages:

i. Options must be paid immediately when bought.

ii. Lack of flexibility for tailor made options,

iii. Only available for major currencies,

iv. Cost is higher than other hedging options,

2. Choice of Invoicing Currency:

a. Advantages:

i. Easiest way for seller to eliminate currency risks,

ii. Ensures no financial surprises,

iii. The currency choice shapes the short run response of prices in both euro and

dollar-destination exchange rates.

b. Disadvantages:

i. There’s a currency risk in part of the buyer side,

ii. Negations will be tough,

3. Choice of Invoicing Currency:

a. Advantages:

i. Guarantees a future price and allows company to control supply risk.

ii. Could be used for hedge currency and interest rate risks.

iii. Contracts are flexible and could be tailored for specific situations.

b. Disadvantages:

i. More complicated than a standard contract,

ii. With increasing timeframe, it carries an increased risk of non-payment or

default.

iii. Could be subjected to default risk and will be difficult to cancel.

iv. Required tying up capital and no intermediate cash flow before settlement.

Step 4: AI-Enhanced Scenario Simulation

 Scenerio 1: What would be the financial impact if the local currency depreciates by 10%?

The financial impact of a 10% depreciation of the local currency can vary significantly depending
on the context, including the nature of a business, the structure of its operations, and its exposure
to foreign transactions. Here are several key areas to consider:
1. Cost of Imports:

Increased Costs: If a business imports goods or raw materials, a 10% depreciation means those
imports will now cost 10% more in local currency terms.

Inflationary Pressure: Higher import costs can lead to increased prices for consumers, potentially
leading to inflation.

2. Revenue from Exports:

Increased Revenues: For businesses that export goods or services, a weaker local currency can
make their products cheaper and more competitive abroad, potentially increasing sales and
revenue.

Foreign Currency Denomination: If sales are priced in foreign currencies, revenues in local
currency will increase after converting.
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3. Debt Obligations:

Foreign Currency Debt: If a company has debt denominated in foreign currency, the local
currency depreciation will increase the repayment amount when converted back to local currency.

Cash Flow Impact: This could strain cash flow and financial stability if the company does not
have foreign currency revenues to offset the increase.

4. Investment Value:

Foreign Investments: If an entity has investments or assets denominated in foreign currencies, the
value of those investments will increase in local currency as the local currency depreciates.

Capital Expenditures: On the other hand, investments requiring imported materials or technology
may become more expensive.

5. Consumer Behavior:

Changing Spending Patterns: Consumers may cut back on spending due to rising prices, which
can affect local businesses that do not benefit from exports.

Shifts in Demand: The demand for import-based goods may decline if prices increase
significantly, impacting businesses reliant on those goods.

6. Foreign Exchange Risk

Hedging Costs: Companies might incur additional costs related to hedging their exposure to
foreign exchange risk if they foresee further depreciation.
7. Overall Economic Impact:

Trade Balance: A depreciation of the local currency can improve the trade balance by boosting
exports and reducing imports, depending on the price elasticity of demand for those goods.

Investment Climate: The overall economic environment may be affected, with potential
implications for investment inflows or outflows.

Example Calculation:

If a company imports goods worth $1 million, under a 10% depreciation of the local currency, the
cost in local currency will increase from, say, 1 million LC (local currency) to 1.1 million LC.
Conversely, if it exports goods worth $1 million priced in dollars, when converted back to local
currency, the revenue would increase from 1 million LC to 1.1 million LC.

Conclusion:
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The overall financial impact of a 10% depreciation in the local currency will depend on the

specific situation of a business regarding its import/export balance, currency debt exposure, and

overall market conditions. Different businesses might experience positive or negative effects

based on their unique circumstances and exposure.

 Scenerio 2: How might a sudden increase in currency volatility affect hedging strategies?

A sudden increase in currency volatility can have significant implications for hedging strategies
used by businesses and investors. Here are several ways this volatility can affect such strategies:

Increased Hedging Costs: When volatility rises, the cost of hedging typically increases. Options
premiums, for example, tend to rise with higher volatility, making it more expensive to purchase
protective measures against currency fluctuations.

Reevaluation of Hedge Ratios: Businesses may need to reassess their hedge ratios— the
proportion of exposure they choose to hedge. Increased volatility can lead to a review of whether
current hedging levels adequately mitigate risk, potentially resulting in adjustments to the extent
of hedging.

Change in Hedging Instruments: Firms might shift from standard hedging instruments (like
forwards or plain vanilla options) to more sophisticated derivatives (like options with different
maturities or exotic options) that can better accommodate sudden spikes in volatility.

Dynamic Hedging: Companies might adopt more dynamic hedging strategies, where they
constantly adjust their hedge positions in response to changing market conditions. This approach
requires more active management and can introduce additional risks and costs.

Focus on Correlation with Other Variables: Increased volatility may lead businesses to examine
correlations with other financial variables, such as commodity prices or interest rates, to devise
more integrated risk management strategies.

Potential for Speculative Behavior: In times of high volatility, some firms may opportunistically
expand their currency exposure, betting on reverse trends. This speculative approach can
complicate traditional hedging strategies, as it introduces a new layer of risk.

Stress Testing and Scenarios Analysis: Firms may increase the frequency and rigor of stress
testing to understand the potential impacts of extreme currency movements. This can inform
adjustments in hedging policies and strategies.

Impact on Cash Flows and Financial Reporting: Higher volatility can lead to unpredictable cash
flows, affecting the timing and effectiveness of hedging strategies. Additionally, it may
complicate financial reporting, especially for companies using hedge accounting, due to changes
in the fair value of hedged items.
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Liquidity Considerations: Increased volatility can strain liquidity in foreign exchange markets,
making it harder for firms to execute hedging strategies efficiently. This can lead to wider bid-ask
spreads and increased slippage costs.

Regulatory and Compliance Issues: Sudden changes in volatility may bring about regulatory
scrutiny, prompting firms to ensure their hedging strategies are compliant with laws and
regulations, which may necessitate structural adjustments in their approach to hedging.

In summary, a sudden increase in currency volatility can fundamentally challenge existing

hedging strategies, requiring businesses and investors to adapt and reevaluate their risk

management approaches to stay ahead of potential financial impacts.

References:

(1) [Link]

turkeys-residents/

(2) [Link]

db/938/9939/earnings_release/Earnings+Release+%28FY25+Q4%[Link]

(3) [Link]

%20Sonu%C3%[Link]